Jobs, retail sales data support recovery hopes

The number of Americans claiming new unemployment benefits was steady last week and heavy discounting lifted sales at retailers in July, hopeful signs for the sputtering economy.

Initial claims for state jobless benefits edged down 1,000 to 400,000, the Labor Department said on Thursday. Economists had expected claims to rise to 405,000 and the dip last week indicated an easing in layoffs, which have weighed on employment in the past two months.

While the economic slowdown appears to be stretching into the third quarter, what really matters is jobs, said Millan Mulraine, a macro strategist at TD Securities in New York.

The pace of job losses has eased relative to what it was a few weeks ago and that is important because it could reflect positively on confidence going forward.

There was also more encouraging news for the economy, whose growth pace stalled in the first half of this year.

Twenty-five retailers tracked by Thomson Reuters reported a 4.4 percent gain in July sales at stores open at least a year, just above expectations of a 4.3 percent rise.

But the reports failed to ease investors' fears over the stalled recovery, which were exacerbated by Europe's inability to tame its spreading debt crisis.

U.S. stocks tumbled in their worst sell-off in two years, while Treasury debt prices soared. The dollar rallied broadly after the ECB kept interest rates on hold and the Bank of Japan intervened in the market to curb the yen's rise.

U.S. gross domestic product grew at an annual pace of 1.3 percent in the second quarter after a negligible 0.4 percent rate in the January-March period.

Data so far show the anemic growth pace persisted early in the third quarter, with manufacturing hitting a two-year low in July and the services sector expanding at its slowest pace in nearly 1-1/2 years.

ACTIVITY EXPECTED TO PICK UP

We expect economic activity to improve in the second half of the year, which should result in better labor market conditions, said Michael Gapen, a senior economist at Barclays Capital in New York.

Still, the full unwinding of the high gasoline prices and supply chain disruptions stemming from the Japanese earthquake, which led to much of the softness in second-quarter, will take time, but appears to be proceeding.

The slowdown is not confined to the United States.

Sovereign debt problems in Europe have clouded the economic outlook and on Thursday, European Central Bank President Jean-Claude Trichet warned of risks to growth from financial markets and energy prices.

The claims data came before Friday's release of the government's comprehensive employment report for July, which will be scrutinized for signs of how quickly the economy can regain its momentum.

Nonfarm payrolls likely increased 85,000 last month, according to a Reuters survey, after rising only 18,000 in June. The jobless rate is expected to hold steady at 9.2 percent.

The economy remains in a questionable phase and employers are well aware of it, said Jim Baird, a partner at Plante Moran Financial Advisors in Kalamazoo, Michigan.

While a strong rebound in the July numbers is unlikely, some improvement in job creation for July or upward revisions to the June numbers could alleviate some of the market's concerns (of double-dip), at least temporarily.

Jobless claims are hovering around 400,000 and need to break decisively beneath that level to signal a sustainable improvement in the labor market.

The four-week moving average of claims, considered a better measure of labor market trends, fell to its lowest level since mid-April.